What Is Buy Now, Pay Later, and How Does It Work?
Reading Time: 6 minutesYou can pay for your goods later, but should you?
Do you sometimes scroll through your favorite online shopping store, adding items that catch your fancy? Then, head over to the checkout page, and boom!…. You’ve (hypothetically) spent a small fortune.
Now, a part of you wants to drop some of the items so that you won’t be broke for the rest of the month. But, another part of you wants to retain all and pay for them without putting you in danger of going broke. That is where ‘buy now, pay later’ is handy—but how does buy now, pay later work, and should you use it?
What Is Buy Now, Pay Later?
The name says it all; buy now, pay later is a payment plan that lets you purchase items almost immediately and pay for them later. Payments are usually made in installments and spread over an agreed period.
Its roots are traced back to the hire-purchase system, where payments for large purchases are spread over an agreed period. The buy now, pay later payment option is popular with numerous top-rated e-commerce platforms that want to make it ‘easier’ for you to buy their products. Now, along with several safe online payment methods, most businesses accept buy now, pay later plans with the help of buy now, pay later (BNPL) providers.
How Does Buy Now, Pay Later Work?
BNPL applications partner with popular retailers and brand names to make installment payments available on checkout. Like credit cards, they typically charge you an interest rate on your payment. However, some platforms offer an interest-free period for repayment.
For instance, an item costs $500. With BNPL, you may pay a deposit of $100 to receive the item. The balance of $400 will then be spread over four months, i.e., $100 every month.
If the interest-free period is two months, you will pay exactly $200 plus the interest charge in the second and third months.
8 Pros and Cons of Using Buy Now, Pay Later
Buy now, pay later offers many benefits, but there are some considerable downsides, too.
1. Pro: Interest-Free Periods
Paying for an item in installments is often more expensive than paying at once. However, with the interest-free period offered, you can break down payments and purchase your item at no additional cost.
2. Pro: Relaxed Credit Card Checks
Getting approval to purchase items with BNPL applications is easier than getting a credit card. This is because BNPL apps don’t run hard checks on your credit report. Rather they review your credit report to gauge your creditworthiness, and such checks have no impact on your credit score.
3. Pro: Convenient
There’s no denying the ease and accessibility that BNPL platforms offer. With the push of a button, you can purchase an item and pay for them at your pace.
4. Pro: Easy Repayment Process
Paying for your item is as easy as purchasing it. Automatic deductions are made from your account on the payment due date. This saves you the stress of going to the bank or keeping track of repayment dates to initiate the transaction yourself.
5. Con: Easy to Get Into Debt
It’s important to note that every time you take out a buy now, pay later payment scheme, you create debt that must be paid back. Although it may feel like you’re only paying out a small amount for each product each month, if you take out too many BNPL payment plans, you could easily push yourself into debt if you cannot meet your other obligations, like rent, mortgages, household bills, daycare fees, and so on.
6. Con: High-Interest Rates
BNPL apps provide interest-free payment periods but for a limited time. If you cannot clear your payment before that period runs out, you will have to pay interest on your balance, and these rates may be higher than those of credit cards.
7. Con: Late Payment Charges
Sometimes, life happens, and you don’t have the money for your installment when it’s due. BNPL apps get it too, but if you aren’t sticking with the initial agreement, you will be charged a late fee.
These fees can pile up and do a number on your finances. The best way to deal with them is to ensure you make your payments on time.
8. Con: No Opportunity to Build Credit
Sadly, your timely payments for items using BNPL applications do not contribute to your credit score. This is because most BNPL platforms work independently of credit bureaus and do not share your payment history with them.
However, a few report late payments to the credit bureaus, jeopardizing your current credit score.
The 4 Most Popular Buy Now, Pay Later Providers
There are numerous buy now, pay later providers, but here are four popular BNPL services you can use to gain more control over your finances.
1. Paypal Pay Later
Paypal is a popular payment platform among well-known brand names and small businesses. Hence, using them as a BNPL app will guarantee you can shop virtually anywhere.
Paypal Pay Later, different from Paypal Credit, is available in any location where PayPal is available. However, you can only use it online as it is unavailable in stores.
Payments split into four installments (‘Pay in 4’) are interest-free, whereas ‘Pay Monthly’ charges an interest fee (that varies between users). You can spread the monthly payments for up to 24 months.
2. Afterpay
Afterpay is another popular BNPL platform that allows you to set the pace for your item purchase. All payments cleared in four installments or less are interest-free. It can be added to your digital wallets for in-store payments like Apple Pay and Google Wallet.
Afterpay is available for users in Australia, Canada, New Zealand, France, Spain, Italy, and the United States.
3. Affirm
Affirm has a large number of users, and they allow payments on e-commerce checkout sites and in-store.
Affirm allows you to see how much you would pay for a purchase in four interest-free installments, six monthly installments plus interest, and 12 monthly installments plus interest.
It is available for users in Australia, Canada, and the United States.
4. Klarna
Klarna is one of the world’s most popular buy now, pay later services, and it allows you to make in-store payments online with the mobile app and via a web browser. After your initial deposit, the balance is split into three equal payments over six weeks without interest.
Klarna’s lateness charges are capped at 25% of your installment. It is available for users in over 30 countries.
Tips on How to Use Buy Now, Pay Later (Without Going Into Debt)
BNPL platforms are a great way to gain more control over your finances. However, there are some things to bear in mind when using these apps.
- Keep Your Account Funded: Your payments are spread over a period as long as a year, and the money can be called for at any time. Ensure you always have money in your account for these payments to avoid lateness charges and being reported to the credit bureaus.
- Minimal Purchases: Chances are your excitement will cause you to purchase multiple items at once since you can afford the initial payment. However, this can become confusing quickly with keeping track of multiple due dates. And you risk spending a large chunk of your money paying for items for weeks to come.
- Understand How Buy Now, Pay Later Works: You must understand how your BNPL provider works, how payments are spread, the interest rates, and possible lateness charges involved in purchasing on their platform.
- Budget: Buy now, pay later payment plans seem great, but they’re only useful if you’re still living within your means. Create a budget including your BNPL payments, and see how your new monthly outgoing will affect your incomings.
Buy Now, Pay Later vs. Credit Cards: Which Should You Use?
BNPL apps and credit cards sell you the same promise: the ability to buy an item now and pay for it later. So why choose one over the other?
Having a more in-depth approval process, credit cards offer several benefits, like an increased credit limit over time and consumer protection. Buy now, pay later platforms don’t offer these features. BNPL apps are faster and more convenient, but their interest rates are high.
The factors to consider when deciding between a credit card or a BNPL app are:
- Purchase amount
- Repayment period
- Interest payable
- Possible impact on credit score
Don’t forget that missing a payment on either a credit card or a buy now, pay later plan can negatively affect your credit score, harming your chances of securing other lending in the future.
Don’t Get Caught in Debt
Whether you’re trying to get by or rolling in money, it’s nice knowing you can enjoy an item without coughing out the full amount on the spot. Before deciding on what form of payment to use, be sure to understand the implications involved and follow guidelines to get the best out of your experience.
Reference: https://www.makeuseof.com/what-is-buy-now-pay-later/
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